Clearing Up Some Confusion About the New Federal Student Loan Rules

On Wednesday, President Obama introduced two changes to the federal student loan program that could affect several million borrowers. The broad outlines of his plans to encourage loan consolidation and assist people who are struggling financially are reasonably clear.

But if the questions sent to our Bucks blog from indebted people are any indication, any change in Student Loan Land almost inevitably leads to enormous confusion. Many questions had to do with whether private loans, the kind that come from banks and often have higher and variable interest rates, are part of these changes. Nothing is changing with those loans.

This is crucial, since many of the people in the worst sort of trouble — the ones you’ve read about with six-figure balances — often have both private loans and federal loans.

Instead, only those with different kinds of federal loans — an estimated 5.8 million borrowers — will be able to consolidate them into one loan under the new plan and also save themselves a bit of money.

Borrowers also remain befuddled about the confusing eligibility requirements of a two-year-old program that limits the monthly payment for certain federal student loan borrowers based on their income and then forgives any remaining debt after 25 years.

Starting sometime next year, the limit will be cut by a third for certain borrowers, and that will lower payments. Also, loan forgiveness will happen after 20 years. (The income-related changes were already scheduled to happen in 2014, but they will occur sooner now.)

Today, at least 450,000 people participate in the federal income-based repayment program that started about two years ago, though there are probably many more borrowers who are eligible but don’t know about it or haven’t figured out how to sign up.

I’ve answered as many of the reader queries as I can below, and will answer more on the Bucks blog in the coming weeks.

Q. Who is eligible?

A. People with at least one federal loan that they borrowed directly from the federal government and at least one that originated with a bank or other lender. If you have a bunch of bank-issued federal loans but no loan directly from the government, you can consolidate them under an older federal program, but it won’t save you as much money.

The PLUS loans that some graduate students have taken out in recent years are eligible. Perkins Loans and many federal loans for people entering health professions are not eligible. And again, private student loans are not part of the mix here either.